Controversial Israeli legal reforms spark fears for economy

Controversial legal reforms being debated in Israel’s parliament have sparked fears in the high-tech and financial sectors that foreign investors will be scared off in a blow to growth prospects.

The new legislation has been spearheaded by the government of Prime Minister Benjamin Netanyahu, which took office in December and is regarded as the most right-wing in Israeli history.

It aims to curtail the powers of the Supreme Court and give politicians greater powers over the selection of judges.

The proposals could deal a “severe blow to the economy”, former Bank of Israel governors have warned in the country that dubs itself the “start-up nation”.

Writing recently in the top-selling Yediot Aharonot newspaper, former governors Karnit Flug and Jacob Frenkel acknowledged the situation “is still far from that of countries like Hungary and Poland, and its situation is immeasurably better than that of Turkey”.

“But it is important to understand that there is a connection between seemingly unrelated processes, such as the ability of the judiciary to criticise the government, and confidence in the economy, which affects economic performance.”

Key figures in Israel’s high-tech sector — which accounts for some 15 percent of GDP and more than half of exports — have played a key role in the protest movement, which has seen mass rallies in Tel Aviv and other cities.

The judicial reform programme includes a clause which permits parliament to annul decisions by the Supreme Court, which Netanyahu and his far-right allies view as politicised.

– ‘Corruption and uncertainty’ –

Some analysts say uncertainties related to the reforms have already triggered a decline in the economy, with the value of the Israeli shekel falling seven percent against the US dollar since the end of January.

The shekel slumped further after parliament voted in favour of two clauses at first reading on February 21.

This week it was trading at 3.67 shekels to the dollar, a four-year low.

The Tel Aviv Stock Exchange (TASE) was down 5.7 percent over the past month.

High-tech workers have taken part in the protests, saying the industry will suffer if foreign firms lose confidence in the legal system and democratic principles.

Dror Salee, a leading high-tech entrepreneur for the past 25 years, says the impact is already being felt.

“There are no figures yet on the decline in foreign investment, which represents 85 percent to 90 percent of investment in high-tech — but I don’t know of a start-up that is managing to raise funds in this moment,” Salee said.

“Everything we have built over the past 20 to 30 years is collapsing,” added Salee, who has taken part in the protests as one of the leaders of the high-tech sector.

“There is a close link… between economic growth and investment on the one hand and the democratic system on the other”, said Omar Moav, economics professor at Britain’s University of Warwick and Reichman University near Tel Aviv.

“When the judiciary is weakened and the executive can set the rules of the game at its discretion, it opens the door to corruption and uncertainty, two things that will put off investors and markets.”

– ‘Snowball effect’ –

Salee warned of a “snowball effect”, should lawmakers adopt the reforms — currently being debated in parliament with several legislative stages still to go.

“Israelis, who often go to work abroad in high-tech for a few years, will be more likely to leave and fewer to return,” he said.

“The sector will lose its comparative advantage in terms of human capital, which will feed the loss of investments.”

Israel’s tech sector expanded substantially during Netanyahu’s previous 12-year stint in office until 2021. That year the sector accounted for 54 percent of Israeli exports, or $67 billion, according to the most recent figures from the Israel Innovation Authority.

Some critics tie the reform proposals to Netanyahu’s trial on charges of bribery, fraud and breach of trust. He denies the allegations and any link between the reforms and his own court case.

But Moav notes that before the corruption cases in 2019, Netanyahu opposed the judicial reforms.

“Netanyahu, who knows full well the economic cost of judicial reform, is ready to pay the price to escape his run-ins with the law,” he charged.